Research Update:

Romania Upgraded To 'BBB-/A-3' On

Pace Of External Adjustments;
Outlook Stable
Primary Credit Analyst:
Elliot Hentov, PhD, London (44) 207-176-7071; [Link]@[Link]
Secondary Contact:
Aarti Sakhuja, London (44) 20-7176-7111; [Link]@[Link]
Analytical Group Contact:
SovereignEurope; SovereignEurope@[Link]
Table Of Contents
Overview
Rating Action
Rationale
Outlook
Key Statistics
Related Criteria And Research
Ratings List
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Research Update:
Romania Upgraded To 'BBB-/A-3' On Pace Of
External Adjustments; Outlook Stable
Overview
Romania is making progress in reducing its external indebtedness. In
addition, fiscal consolidation and financial sector stability continue to
be on track.
We are therefore raising our long- and short-term foreign and local
currency sovereign credit ratings on Romania to 'BBB-/A-3' from 'BB+/B'.
The stable outlook balances the likelihood of fiscal and reform programs
exceeding our expectations, against the possibility of external
imbalances re-emerging.
Rating Action
On May 16, 2014, Standard & Poor's Ratings Services raised its long- and
short-term foreign and local currency sovereign credit ratings on Romania to
'BBB-/A-3' from 'BB+/B'. The outlook is stable.
Rationale
The upgrade reflects Romania's rapid progress in improving its external
balances. It also underlines our view that progress toward consolidating the
fiscal accounts and bolstering financial sector stability will continue.
We believe Romania will maintain steady GDP growth, averaging 3% over
2014-2017. While this is slower than before the 2009 financial crisis, it is
above any regional peer. This underlines the return of relatively healthy
fundamentals, even if Romania's national income per capita in 2014 is still
roughly equal to its 2008 high. In 2013 and 2014, external demand has been
driving growth and we expect a gradual shift toward domestic demand with net
exports slightly dragging on growth in 2016-2017.
This should not dramatically reverse the progress in the external account,
which we consider to be largely structural. Romania's shift toward a more open
economy means that exports now constitute 42% of GDP, compared to 31% in 2009.
Rapid export growth and flat import demand in 2013 helped lower the current
account deficit to 1.1% of GDP, its lowest in two decades. While we forecast
the deficit to slowly double to 2.1% by 2017, this rise nevertheless
constitutes structurally lower deficits. The underlying reasons appear to be
increased value-added (seen in the declining imports-to-exports ratio) and
overall increased energy efficiency in the export sector. These recent trends
are unlikely to be reversed in the medium term.
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Lower current account deficits also translate into a healthier external debt
profile, with net FDI exceeding headline deficits at least until 2017.
Consequently, Romania's external debt levels are also bound to decline, with
net external debt shrinking to 15% of GDP in 2015 from a high of 22% in 2012.
The increased absorption rate of EU structural funds should also ensure a
capital account surplus of about 1.7% annually, further supporting the
external deleveraging. That said, part of the decrease of Romania's external
indebtedness pertains to its financial sector, which has seen foreign-owned
banks repatriate significant funds since 2009. Systemwide, net financial
sector external debt has declined to 22% of current account receipts in 2014,
from 44% in 2009.
Since signing a two-year precautionary Stand-By Arrangement with the
International Monetary Fund (IMF) last September, Romania has undergone two
reviews which have confirmed its fiscal consolidation trend. Romania also
appears to have made progress in paying down arrears, the bulk of which
remains in public-sector enterprises--totaling about 1% of GDP.
In light of the policy anchor provided by the Stand-By- Arrangement, we
forecast general government deficits remaining close to but below 2% of GDP in
the medium term. In terms of government debt levels, this means that we expect
sovereign indebtedness to remain largely flat over the coming three years. We
do not foresee any lessening in the government's overall interest burden, as
improvements in Romania's spread are likely to be offset by global trends in
rising benchmark interest rates. However, with interest payments at about 5.5%
of government revenues and net debt at roughly 33% of GDP, general government
debt metrics are neutral at this rating level and, if anything, offer the
potential for improvement. More than 60% of gross general government debt is
in foreign currency, indicating some vulnerability to adverse exchange-rate
movements.
While Romania enjoys a flexible exchange rate regime, an independent monetary
policy remains constrained by a relatively high share of foreign currency use
in the economy, especially in bank lending. That said, we expect euroization
to continue to decline in the near future before picking up again ahead of
eurozone entry.
Domestic political uncertainty has not recently affected economic performance,
but we continue to view Romania's governance framework as a ratings weakness.
Emerging geopolitical risks should also be contained as Romania's economic
links with Ukraine and Russia remain fairly limited (for instance, combined
exports and imports are less than 5% of total exports and imports) and we do
not foresee any direct security implications.
Outlook
The stable outlook indicates that upside and downside risks to the long-term
ratings are broadly balanced. We could raise the ratings if the planned
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Research Update: Romania Upgraded To 'BBB-/A-3' On Pace Of External Adjustments; Outlook Stable
program of budgetary consolidation, public finance reform, and public
enterprise restructuring is implemented successfully without changing current
trends regarding external imbalances and financial sector stability.
We could lower the ratings if Romania's external imbalances re-emerge, if
stability in its financial sector weakens, or budget deficits widen
significantly.
Key Statistics
Table 1
Romania - Selected Indicators
2007 2008 2009 2010 2011 2012 2013e 2014f 2015f 2016f 2017f
Nominal
GDP (US$
bil)
171 204 164 165 183 169 189 205 214 222 234
GDP per
capita
(US$)
8,074 9,902 8,040 8,120 9,051 8,419 9,435 10,257 10,752 11,192 11,816
Real GDP
growth
(%)
6.3 7.3 (6.6) (1.1) 2.3 0.6 3.5 2.8 3.0 3.2 3.2
Real GDP
per capita
growth
(%)
7.0 9.9 (5.7) (0.4) 2.8 1.1 3.9 3.1 3.3 3.5 3.5
Change in
general
government
debt/GDP
(%)
2.6 3.1 9.9 7.9 6.0 5.0 3.0 2.2 2.3 2.2 2.2
General
government
balance/GDP
(%)
(2.9) (5.7) (9.0) (6.8) (5.5) (3.0) (2.3) (2.2) (1.9) (1.8) (1.8)
General
government
debt/GDP
(%)
12.8 13.4 23.6 30.5 34.7 38.0 38.4 38.4 38.5 38.5 38.5
Net
general
government
debt/GDP
(%)
9.4 11.4 19.6 27.0 31.4 33.0 32.8 33.3 33.5 33.6 33.6
General
government
interest
expenditure/revenues
(%)
2.0 2.1 4.8 4.6 4.8 5.3 5.4 5.4 5.5 5.5 5.5
Oth dc
claims on
resident
non-govt.
sector/GDP
(%)
36.7 39.4 40.9 41.0 41.0 39.7 35.7 34.0 33.6 33.6 33.5
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Research Update: Romania Upgraded To 'BBB-/A-3' On Pace Of External Adjustments; Outlook Stable
Table 1
Romania - Selected Indicators (cont.)
CPI
growth
(%)
4.8 7.8 5.6 6.1 5.8 3.3 4.0 2.9 3.0 3.0 3.0
Gross
external
financing
needs/CARs
+use. res
(%)
112.3 114.8 103.9 95.9 95.3 95.7 89.9 87.2 86.3 85.7 85.0
Current
account
balance/GDP
(%)
(13.4) (11.6) (4.2) (4.4) (4.5) (4.4) (1.1) (1.0) (1.3) (1.8) (2.1)
Current
account
balance/CARs
(%)
(36.3) (30.2) (11.2) (10.8) (9.9) (9.6) (2.2) (2.0) (2.5) (3.4) (3.8)
Narrow
net
external
debt/CARs
(%)
42.3 49.4 76.3 72.5 63.8 70.9 55.9 49.6 44.9 41.6 38.1
Net
external
liabilities/CARs
(%)
124.9 120.0 169.6 151.1 128.7 147.8 129.4 120.2 114.2 110.5 105.5
Other depository corporations (dc) are financial corporations (other than the central bank) whose liabilities are included in the national definition
of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year
plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as
the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid
assets held by nonresidents minus financial sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net
external lending. CARs--Current account receipts.
The data and ratios above result from S&Ps own calculations, drawing on national as well as international sources, reflecting S&Ps independent
view on the timeliness, coverage, accuracy, credibility, and usability of available information.
Related Criteria And Research
Related Criteria
Sovereign Government Rating Methodology And Assumptions, June 24, 2013
Methodology For Linking Short-Term And Long-Term Ratings For Corporate,
Insurance, And Sovereign Issuers, May 7, 2013
Criteria For Determining Transfer And Convertibility Assessments, May 18,
2009
Related Research
Sovereign Defaults And Rating Transition Data, 2013 Update, April 18,
2014
In accordance with our relevant policies and procedures, the Rating Committee
was composed of analysts that are qualified to vote in the committee, with
sufficient experience to convey the appropriate level of knowledge and
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Research Update: Romania Upgraded To 'BBB-/A-3' On Pace Of External Adjustments; Outlook Stable
understanding of the methodology applicable (see 'Related Criteria And
Research'). At the onset of the committee, the chair confirmed that the
information provided to the Rating Committee by the primary analyst had been
distributed in a timely manner and was sufficient for Committee members to
make an informed decision.
After the primary analyst gave opening remarks and explained the
recommendation, the Committee discussed key rating factors and critical issues
in accordance with the relevant criteria. Qualitative and quantitative risk
factors were considered and discussed, looking at track-record and forecasts.
The chair ensured every voting member was given the opportunity to articulate
his/her opinion. The chair or designee reviewed the draft report to ensure
consistency with the Committee decision. The views and the decision of the
rating committee are summarized in the above rationale and outlook.
Ratings List
Romania
Upgraded
To From
Romania
Sovereign Credit Rating BBB-/Stable/A-3 BB+/Positive/B
Senior Unsecured BBB- BB+
Short-Term Debt A-3 B
Transfer & Convertibility Assessment A- BBB+
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(46) 8-440-5914; or Moscow 7 (495) 783-4009.
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Research Update: Romania Upgraded To 'BBB-/A-3' On Pace Of External Adjustments; Outlook Stable
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